Commission plans to suspend Hungary’s cohesion funds

The European Commission today proposed blocking €495 million in EU cohesion funds that Hungary was due to receive next year.

The Commission said the funds, around a third of Hungary’s allocation for 2013, should be frozen because the country had made insufficient effort to get its public deficit under control.

This is the first time that the Commission has tried to withhold funds for regional development as a way of punishing a country for running an excessive deficit.

Olli Rehn, the European commissioner for economic and monetary affairs, said that the decision was an “incentive to correct a deviation, not a punishment”.

He said that Hungary could avoid losing the funds if it took “sustainable and credible” action to reduce its deficit by the end of this year. “Hungary has until 1 January 2013 to get its deficit back on track. I trust it will do so,” Rehn said.

He pointed out that national finance ministers had backed the Commission’s proposal to take action against Hungary at a meeting on 24 January.

Johannes Hahn, the European commissioner for regional policy, said that the Commission had decided to freeze only half of Hungary’s cohesion funds allocation so that there would be money available to go ahead with planned projects. “It gives Hungary the chance to take decisive action without blocking an important artery for economic growth,” Hahn said.

Hungary’s deficit is expected to reach 3.25% of gross domestic product in 2013, above the 3% limit for EU countries.

Under the rules for structural funds, the EU can suspend or withhold funds if a country fails to take action to reduce its deficit to below the 3% limit.

The Hungarian government said that the Commission’s proposal was “unfounded and unfair”. A statement issued by the prime minister’s spokesman said: “It is unfathomable why the European Commission has ignored the facts”. He said that Hungary’s deficit was below 3% in 2011 and that the government had taken action to ensure it wiould be below the threshold in 2013. “Our prime minister duly informed the president of the Commission about these measures,” he said.

The spokesman said that the Commission’s decision was “controversial” from a legal point of view. It “contradicts the spirit of the treaties since it imposes sanctions in response to a presupposed future event”, he said.

The decision to suspend funds came a day after Viktor Orbán, Hungary’s prime minister, wrote to the Commission setting out measures to cut the deficit. Rehn said the measures outlined in the letter were not sufficient to address the Commission’s concerns.

Controversial laws

Asked if there was a link between the decision to freeze the cohesion funds and infringement procedures that the Commission has launched against three Hungarian laws, Rehn said it was a “different procedure”. The Commission has launched infringement proceedings against Hungary over laws it says breach EU rules on the independence of the central bank, judges and the data-protection supervisor.

The Hungarian government formally responded to the Commission last Friday (17 February). It offered to make some changes to the laws to address the Commission’s concerns, but defended other parts of the laws as not having any detrimental effect.

Rehn said that the Commission would respond to the Hungarian government over the infringement case “in the coming weeks”. If it is not satisfied with Hungary’s responses, the Commission can refer the country to the European Court of Justice (ECJ). The ECJ can impose fines if a country fails to bring its laws into compliance with EU legislation.